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How the big pieces fit together: US and Trade Wars

Ahead of RiskMinds Americas, we asked Dr. John Hulsman, President and Managing Partner of John C. Hulsman Enterprises and Geopolitical Expert at U.S. Council on Foreign Policies to break down the current situation between the Trump administration and the allies and counterparts engaged in ongoing "trade wars". 

In literally every way you look at it, Trump’s trade war is a staggering case of self-harm”

Whistling past the graveyard

While markets and much of the commentariat continue to take a  holiday from history in underestimating the global trade war—with the Trump administration firing the first real salvo last month in imposing $34 billion in tariffs on Chinese high-tech goods—savvy investors and analysts would do well to take stock. For intellectually whistling past the graveyard, burying our collective heads in the sand about how disastrous a process has just been initiated by the overly-confident, under-prepared trade hawks in the White House, is not some peripheral global issue. Rather, the trade war has moved from being a major source of global political risk, to the major source of global political risk.

A vicious cycle without end 

In this new multipolar era--where like the time of late Victorian England, the US remains by a long way the greatest power in the world even as other great powers are gaining on it—the name of the game is strengthening alliances due to the competitive advantage they bestow, as well as enticing rising powers to become part of the American-established and dominated international system. Given the structural geopolitical realities of the odd form of lopsided multipolarity we find ourselves living in, this is the clearly established great power strategy necessary for continued American success. Yet, somehow, the Trump White House is not only ignoring the obvious way forward, it is taking an axe to it.

For the trade war fails America generally (and the Trump administration specifically) economically, politically, in policy terms and geopolitically. Frankly, it is almost impossible to do worse than that.

Economically, while the direct economic costs involved in the initial tit-for-tat tariff war with China are still quite small (it is estimated that only a measly .1% to .2% of GDP will be wiped off both countries’ overall economic product) the numbers are not the story here. The first $50 billion in US and Chinese goods where tariffs are levied (the total will rather automatically rise from the present $34 billion in the next weeks) are not the problem. The vicious cycle they are the first step in perpetuating is.

The dreary pattern is already clearly established. The US brazenly slaps tariffs on friends (EU, Canada, Mexico) and possible foes (China) alike, over-confident that given that all these entities are more export oriented than America and that many of them (particularly Beijing) run huge trade surpluses with the US, they have more to lose and will quickly settle the commercial spat on American terms.

Yet though they are strong nationalists themselves, the White House seems to have somehow forgotten that other people have nationalism as well. They are surprised as in every case, rather than settle, each power instead quickly and decisively imposes counter-veiling duties of the same amount on US goods.

Still convinced that the others will cave, the Trump administration is bound to increase tariffs on an ever broader range of goods, absolutely assured that they will ultimately triumph in this insane game of chicken.

Given the economic-death cycle the trade wars have unleashed it is only when enough plates calamitously hit the ground that anything is likely to change.

This can be seen by the staggering fact that at present (July 8, 2018) despite the imposition of tariffs which Chinese newspapers describe as inaugurating ‘the biggest trade war in economic history,’ neither Beijing nor Washington are seriously negotiating an end to the crisis; in fact, astoundingly, there are at the moment no plans to even hold talks on the issue. It is clear the trade war is just starting, rather than amounting to a blip on the summer holiday scene. It is also clear that the vicious cycle has just begun.

Given that nationalism runs strongly in China, even as anti-Trumpism is a potent political force in Mexico (witness the recent landslide election of veteran leftist nationalist Andreas Manuel Lopez Obrador as the country’s new president), Canada, and Europe, it is hard to see how the intended objects of President Trump’s trade war can gracefully concede to his demands--of both an unreasonable (export quotas) and reasonable (halting the widespread theft of American IP) nature—and stay in power.

If the other powers continue, in defiance of the Trump team’s expectations but thoroughly in line with mine, to defy the White House, it is clear that the president will do as he threatens and heap on ever-greater tariffs, which make any positive conclusion to the crisis ever more unlikely.

Given the economic-death cycle the trade wars have unleashed it is only when enough plates calamitously hit the ground that anything is likely to change. Only when markets, at last but definitively losing confidence amidst all this policy nonsense, go south that things will change. Sadly, by then, a great deal of unnecessary damage will have been done.

For the administration the costs will by almost incalculable. The Trump White House will have put at risk the present desperately-needed fair winds guiding the global economy, given Republican establishment party renegades a basic economic management and competence argument to rally around against him, failed to deal with the very real problem of IP theft by binding Europe to its side in facing down China over this in the WTO, further estranged the creaking western alliance, and made China emerging over time as a status quo power even more highly unlikely.

As Deep Throat put it in the peerless Washington film, All The President’s Men, ‘Follow the money.’ Doing so right now pays off handsomely for both today’s investor’s and analysts alike, as in tallying up the costs of President Trump’s ruinous trade war, the outlines of a new era can be dimly, but concretely, seen. And understanding the new world we live in makes all the difference.

RiskMinds Americas

Dr. John C. Hulsman is President and Managing Partner of John C. Hulsman Enterprises, a prominent global political-risk consulting firm. His new book, To Dare More Boldly: The Audacious Story of Political Risk, was published by Princeton University Press in April and is available on Amazon.

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